Bahrain's investment banking crisis (page 2 of 2)

However, analysts say it would be wrong to read too much into this.

'Bahrain has built up its reputation over a long period,' says Stubing. 'It is still home to a lot of financial institutions and continues to attract more.'

Shahid Hameed at SICO agrees. 'I have not seen any impact coming through,' he says. 'The market has accepted that these things happen everywhere: institutions go bankrupt.'

Whatever damage has been done to Bahrain's credibility, BMB remains confident it can pull through. 'We do believe BMB is on the road to a full and healthy recovery,' says Albert Kittaneh, the bank's chief executive.

'The bank has been able to withstand the suspension of all it's interbank lines since September 2002 and has not only been able to survive, but has also continued to meet all its investment obligations in 2003 and so far in 2004.

'The private equity assets in the bank's portfolio have withstood the 'burst' of the tech bubble as well as the global economic downtrend. Additionally the sale of these private equity assets, even during the distressed period between 2000-03, has continued to take place at roughly three times our original cost.

'As the global economy recovers further, we expect these assets to realize even more profit both for the bank and its customers.'

However, without the support of lenders and shareholders, this will mean little. Kittaneh says the major shareholding group has pledged to back a capital injection, most likely through a rights issue.

But BMB is still effectively in default on a $75 million credit facility with a group of international banks, and analysts say at least one of the creditors has voiced concerns about the viability of BMB continuing as a going concern.

It is understood they were considering pressing for an asset realization protocol (effectively a winding up order), similar to that agreed for BIB in May. New deals. BMB management, shareholders, creditors and the BMA met in Manama in January in a bid to thrash out a deal.

Kittaneh says he is confident all creditors will soon approve an agreement that will see BMB emerge as a fully functioning bank. 'The negotiations are proceeding satisfactorily and we are close to completing the refinancing of the loan. There are a few remaining minor points in the documentation which we hope to be able to finalize very shortly.'

Assuming that BMB does pull through, Kittaneh says a period on consolidation will follow. Only then will a new strategy emerge.

'Obviously after such a turbulent period in the history of the bank the first order of business us to regroup and reestablish profitability in order to regain the confidence of the financial markets, our correspondents and our customers. This should take us through 2005, after which our strategy will become much clearer.'

He stresses that all the bank's customers have continued to make profit on their investments with BMB, albeit at a slower rate due to the global economic downturn of the last few years. Clearly, BMB will face challenges.

It will have to rebuild its reputation. And it will have to come to terms with the general trend among Gulf investors to target investment opportunities in their domestic markets, rather than using investment banks to channel excess cash into the West. It may be some time before any Bahraini investment bank returns to the boom days of the late 1990s, when profits soared on the back of the US technology boom.

But with heavyweight players such as Investcorp and Arab Banking Corporation reporting bullish performance in recent months, no one should write off Bahrain and its investment banks just yet.